Tagged: capitalism

I know I am walking a fine line here. The social capitalism is a term coined probably by Kees van Kersbergen in his published work, “Social Capitalism: A Study of Christian Democracy and the Welfare State”. Kevin Rudd also made references to this model in his speeches during his Prime Ministership which came about the time when the Global Financial Crisis (GFC) was in full swing. In essence this model proposes an improvement of the capitalist model through a greater intervention of the state designed to address imbalances using macroeconomic regulatory tools. This post does not refer to such model. This article focuses more on the corporation as an economic entity and the transformation of its model of operation which has more and more a broader social meaning, as opposed to a narrow economic definition. I use the term eco-social capitalism because it refers to the existence of corporations in the context of the natural environment and social habitat, rather than an element on government’s agenda.

Many centuries ago a wonderful innovation was created: the corporation with limited liability. This propelled the economic development at amazing speeds. Where before the risk sat with the individual entrepreneur, the limited liability increased the appetite for risks and large rewards. East India Company, launched on 31 Dec 1600 with the royal blessing of Queen Elizabeth I, is probably the oldest chartered company. Investors put their money into this venture hoping for big gains. When the first ship returned back the profit was huge, some reports indicating Drake made a 5,000% return. This was one lucky strike because over the years many ships went under ruining hopeful investors. The morale of this story is that shareholders take the risks and the rewards and this is all that mattered. Until now.

In recent years the corporates, especially the large public companies with transnational operations and vast resources at their disposal, have undergone a radical change in the way they are perceived by the public. Many companies are accused of putting the interests of their shareholders and executives ahead of the broader community. This unfavourable image is compounded by the fact that many companies use cheaper labour markets to increase their profits at the expense of local employees.

In Creating Shared Value, an article published in Harvard Business Review magazine (2011), Michael Porter and Mark Kramer redefine the corporation in very different terms using the concept of the “shared value”. Departing from a model in which the corporations act as a self-contained entity, Michael Porter is proposing a model that extends the business concerns beyond “internal” processes to include “externalities” such as social and environmental issues. The practical reason is the limitations and the risks associated with a regulatory regime that as elected representatives tries to respond to the public concern by imposing laws and regulations that force the companies to address environmental and social issues. However this solution creates a very complex environment which increases the costs of business, it reduces the speed of new jobs creation and actually incentivising corporations to consider moving some of their operations overseas.

The better option is for the corporation to have an more flexible strategy of creating shared value. This requires an approach to the value add process which incorporates the “externalities” in the business design from the very beginning. This is not a welfare initiative and this is not a “fair trading” scheme, but an adjustment of business scope beyond the creation of value for its shareholders. This works only if the corporation investigates opportunities in three areas:

Reconceiving products and markets

Redefining productivity in the value chain

Building industry supportive clusters at the company’s locations

This creates vast opportunities, if the company has the adequate resources, brain power being one of them. The approach resembles the Blue Ocean strategy (W Chan Kim, Renee Mauborgne) which takes into consideration all the elements of the value chain and find competitive ways in which a distinct value proposition can be offered. The two main elements of the strategy are the environment and the communities. The environment includes resources and energy while the communities include local wellbeing, employment in areas that match the local skills, local economic development through planting seeds of industry green shoots that help regional development and thus supporting the existence of a sustainable market where the company can supply its goods and services.

There is an interesting point in the case of government agencies. The notion of good from the point of view of the role of the agency is the delivery of benefits to the society. This has been the case for most agencies. It sounds like a “duh” moment, but when you take a closer look, delivering benefits does not necessarily mean producing value. Value is generated only when benefits are delivered at the right cost, otherwise there is no value. In fact the focus on benefits rather than value is the cause of the current budgetary crises in local and federal governments in many countries. The benefits or even worse, the mere exercise of a function, while ignoring the cost, builds up losses after losses, hidden behind the positive news. In the wider context these benefits cost more and at the expense of other areas which will be underfunded and neglected. A government agency that chooses to focus on creating value by looking for opportunities in the same three areas will support society and environment in a sustainable way ensuring more equitable long term prosperity.

The shared value creation model is very appealing and it is increasingly applied by large companies with sufficient financial clout and intellectual capital. It is difficult to believe though that in general corporations will adopt this model consciously because “it is good”. The real driving engine is the necessity of managing the risk of losing reputation which threatens to destroy a company faster than many think is possible. BP almost collapsed during the disaster in the Gulf of Mexico.

The change is dramatic, but difficult. This is more so for listed companies which have a tortuous reporting cycle that forces the adoption of a short term vision. The change to a business that creates shared values is almost impossible. However the public pressure will “help” this transition. Because the reporting cycle required by sharemarkets around the world is an impediment, and most agree that it comes with negative consequences, it may be that we will see the dawn of a new investment system by which the pooling of capital will take place outside sharemarkets.

I am not referring to private equity but to a new way of public participation to enterprise ventures based on very fast global networks in which information is shared and large group of participants can take part in new start ups some of them as investors and others as creators. This new “shareholding” system is already being used to setup companies that have a different moral compass and that are made up of people who are more ethically advanced and conscious of our responsibility towards the fragile environment in which we live. This also means that people with superior societal skills, knowledge of environmental concepts, team work and creativity will be in high demand. The eco-social capitalism is here already.